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Cablegate: U/S Taylor's Meeting with Finance Minister

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 ABUJA 001007

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON EFIN EIND EINT EMIN ENRG EPET ETRD ETTC NI
SUBJECT: U/S TAYLOR'S MEETING WITH FINANCE MINISTER

REF: A. ABUJA 954
B. ABUJA 903

1. Summary: In a meeting with Treasury U/S Taylor, Nigerian
Finance Minister Okonjo-Iweala said the Ministry will carry
out an audit of petroleum revenues to make sure the GON is
getting its fair share, and the results will be reported to
the public. The GON is sidelining its windfall cash from
higher-than-budgeted oil revenues and hopes to use a good
chunk of it for infrastructure investment. Civil Service
reform is proceeding in four ministries, eliminating "ghost"
workers, cutting positions at the lower levels and hiring
more skilled people at the top. The Finance Ministry intends
to bring Nigeria's tax and customs systems more into line
with ECOWAS norms, eventually ending the various product
bans. The GON is considering a bond issue aimed at the
Nigerian Diaspora to raise funds for mortgage lending. And
the GON was disappointed at not being selected for the
Millennium Challenge Account but hopes to be selected when
future data show evidence of the effectiveness of the GON's
current reforms. End Summary.

2. On May 25, 2004, Treasury Undersecretary for
International Affairs John B. Taylor met with Nigerian
Finance Minister Dr. (Mrs.) Ngozi Okonjo-Iewala at the
Ministry of Finance in Abuja. The two conducted a meeting of
over one hour covering the waterfront on Nigerian economic
reform.

-----------------------------------------
Transparency: Audit of Petroleum Revenues
-----------------------------------------

3. Minister Okonjo-Iweala introduced Dr. Bright E. Okogu,
the Finance Minister's Adviser on Oil and Gas, and noted that
his full-time job was to account for Nigeria's oil revenues.
She strongly supports the EITI (Extractive Industries
Transparency Initiative) but sees an asymmetry of information
in that the GON has little insight into the costs and
expenditures of multinational oil subsidiaries in Nigeria.
For this reason, the GON is about to begin an audit of oil
production and revenues, both of the GON and the
multinational oil subsidiaries working in Nigeria. The
Minister had advertised in the international financial press
to seek bids from auditors that have the capacity to carry
out this large audit.

4. For the audit, the GON has received the support or
technical assistance from the Soros Foundation as well as the
UK's Department for International Development (DFID) and the
World Bank. The Minister hoped to have the audits started
this summer and finished by the end of 2004, with a
preliminary report issued in December that she would release
publicly. Even in the absence of intentional fraud, there
may be anomalies in accounting for oil revenues. She noted
that former World Bank Chief Economist and Nobel Prize Winner
Joseph Stiglitz had analyzed Alaskan oil revenues and found a
discrepancy of a few cents per barrel. In the end,
Exxon-Mobil ended up returning a billion dollars per year to
the Alaskan government.

5. One of the difficulties the Minister faces is the choice
of an auditor. There are few auditing firms with the
international capacity to do such a large audit, and one had
to make sure these were not the same firms that audited the
oil multinationals in the first place. She asked the
Undersecretary his advice in finding the proper auditors for
this purpose. The Undersecretary recommended that the
Minister choose the best auditor she could find under these
constraints, then have a panel evaluate the results of the
audit.

--------------------------------
Transparency: The Federal Budget
--------------------------------

6. Beyond oil and gas, which accounts for over 70% of
Nigeria's budget, the Minister spoke of her efforts toward
making the entire budget process transparent. She passed out
copies of "Understanding the Budget 2004," a simple brochure
written at the high-school level and intended for a broad
public. She expressed pleasure that the GON had gotten the
budget deficit down to less than two percent of GDP. She was
confident the GON would meet the 2% deficit target and
considered it a sort of "work performance measure" for
herself.

7. In order to monitor the budget and keep it on track, the
Minister conducts monthly meetings of a Cash Management
Committee. This committee matches current and projected
expenditures. In addition, the IMF is monitoring Nigerian
finances quarterly. Very precise structural benchmarks are a
part of the National Economic Empowerment and Development
Strategy (NEEDS), and Nigeria is acting as if it were under
an IMF Structural Adjustment Program, the Minister stated.

--------------
Budget Process
--------------

8. On the budget, the Minister was very pleased for the
first time in several years to have a budget passed by both
houses and signed by the president. She characterized the
process of arriving at a budget as being full of
"congressional interference," but the all parties came to
agreement after much consultation. In addition to the low
deficit, she liked the fact that the AIE, "authority to incur
expenditure," had been limited to a much smaller number of
people than previously. The Due Process Office under Dr. Oby
Ezekeswili reviews contracts twice a month, and no contract
can be approved until audited. (Reftel 2)

------------------------------------
Eliminating Subsidies on Fuel Prices
------------------------------------

9. Regarding fuel prices, the Finance Ministry had attempted
to eliminate subsidies and add a tax to oil of Naira 50 per
barrel for road construction and maintenance. As a result of
the price hike, organized labor took the government to court.
But contrary to popular opinion, the court had only ordered
the removal of the petroleum tax but not the continuation of
subsidies, so gasoline prices were on their way back up
again. (Comment: Price at the pump in Abuja was Naira 53
per liter on May 30, a good 20% above price levels in
previous weeks. Labor unions are threatening strikes June 9.
End comment.)

--------------------------------------------- -------
Reserve Account for "Excess Revenues" from Petroleum
--------------------------------------------- -------

10. The Finance Ministry was very careful to maintain
"excess revenues" from petroleum sales in a special reserve
account. (Note: in the Nigerian budget context, this refers
to sales of petroleum above the benchmark price of USD 25 per
barrel. End Note.) The Minister thought it very important
that the government not dip into this account in normal
times, or one would see volatility, growth of the money
supply and inflation. When oil prices decrease, the GON
could use the reserves from this account to shore up budgeted
expenditures. Although the assets in this account belong to
the entire federation, she did not want to share it with the
states unless they had a dialog and passed a fiscal
responsibility bill. So far, twelve of the 36 states are
willing to agree to this on the condition that they get their
own separate "excess revenues" account. She was proud of the
fact that the federal government had saved USD 1.5 billion in
this account so far.

---------------------------
Infrastructure Investments?
---------------------------

11. Although the reserve account is primarily for saving
"excess revenues" and smoothing out the effects of oil price
volatility, the Minister expressed interest in using part of
these funds to invest massively in infrastructure. She noted
that investors in Nigeria put infrastructure first on their
list of problems for doing business in Nigeria, and this
discourages new investment. Spain had changed dramatically
after its admission to the European Union, mainly because the
EU invested massively in Spain,s infrastructure. It would
take USD 700 million per year just to repair and maintain
Nigeria's roads, so infrastructure investment, to be
effective, would have to be massive.

---------------
Monetary Policy
---------------

14. Nigeria is closely following IMF-approved monetary
targets, the Minister said. She welcomed the appointment of
President Obasanjo's chief economic advisor, Dr. Charles
Soludo, as Governor of the Central Bank of Nigeria (CBN).
She characterized the CBN as "quite independent" and
expressed confidence the CBN under Soludo's leadership would
reduce money supply growth and hold to development targets
with the help of the IMF. And since Dr. Soludo is a
co-author of the NEEDS program, he would continue to support
the NEEDS program.

--------------------
Civil Service Reform
--------------------

15. Civil service reform is underway, particularly pension
reform, monetization of benefits, eliminating overlap and
right-sizing. Four ministries are pilot projects for this:
the ministries of Finance, Planning, Information and the
Federal Capital Territory (FCT). Ministries are judged by
their functions and how well, or whether, they perform them.
Analysis showed that the ministries were too heavy at the
bottom and too light at the top. The Finance Ministry, is
now eliminating positions at the lower level while hiring
more top-level people. British Prime Minister Tony Blair
lent the GON his service delivery expert to assist ministries
in setting goals and targets.

16. The FCT Ministry faces special challenges, providing
services for six million people in a territory originally
planned for three million. Its Minister, Nasir El-Rufai is a
Minister, mayor and governor rolled into one. Civil service
reform immediately resulted in the reduction of the FCT,s
workforce from 25,000 to 22,000 without a single layoff. An
audit revealed that 3,000 FCT workers were "ghost workers,"
fictitious names on the payroll whose salaries were
presumably collected by others.

17. The next ministry she hoped to bring into the civil
service reform process was the Ministry of Works.

-------------
Privatization
-------------

18. The Minister reported the GON is struggling with
stated-owned electric power monopoly Nigerian Electric Power
Authority (NEPA) and is currently struggling with ways to
unbundle the various services (e.g., power transmission,
power generation, etc.). She was happy to report the GON had
sold a refinery in Sierra Leone and was seeking to privatize
four refineries in Nigeria.

------------------
Telecommunications
------------------

19. Minister Okonjo-Iweala noted that allowing private
wireless telephony companies into the market had transformed
the telecommunications sector in Nigeria. Prior to
liberalization, Nigeria had around 400,000 telephone lines.
Now, thanks to wireless telephony, the country has 4.5
million telephone lines.

----------
Tax Reform
----------

20. In the area of tax reform, the GON is trying to bring
down the multiplicity of taxes, levies and excises and lower
the corporate income tax rate from 30% to 20%. The GON will
also raise the Value Added Tax (VAT), because Nigeria's at 5%
is below Ghana's at 5 1/2 % and well below the 10% average in
West Africa. UNDP and the EU were supporting implementation
in this area. The Minister had hired a very capable young
woman who had run her own firm in the private sector to run
Nigeria's internal revenue service. The GON had also retired
the top 75 customs managers and accelerated the promotion at
the lower ranks to the top jobs. She hopes the new managers,
with the help of training, standardization and automation,
will help clean up the customs service, which she
characterized as "terribly corrupt." She noted this move was
very popular with the public and sent a strong signal.

-------------------------
Foreign Direct Investment
-------------------------

21. Foreign Direct Investment (FDI) increased slightly. The
CEO of Nestl, which had been disinvesting in Nigeria since
the 1970s, told the Minister in January that he was so
confident about the direction in which Nigeria is heading
that Nestl planned to invest 30 million Swiss Francs (USD 24
million) in a factory in Abeokuta. An Italian firm had
decided to open a leather goods factor in Kano. And South
African companies would invest USD 1 billion in oil and gas
as well as non-oil services such as hotels. The Protea chain
is opening a hotel in Lagos on Bar Beach. Agralite plans to
invest USD 20 million in solid minerals exploitation,
including tantalite, for which there are major deposits in
Nigeria, including in the FCT. The Swiss will invest USD 20
million in dairies. And Robotics Professor Dr. Bart Nnaji is
investing in an independent power plant in Abia state that
will be gas-powered and able to produce 50 megawatts at eight
cents per kilowatt.

---------------------------------
Housing: Diaspora Mortgage Bonds?
---------------------------------

22. Nigeria hopes to gain assistance from the Nigerian
diaspora in the US. The Minister noted that Mexico got
members of the Mexican diaspora in the US to provide funds
for underwriting mortgages in Mexico. India was also able to
pull in funds from the Indian diaspora, both for government
guaranteed and private sector bond issues. The Nigerian
diaspora in the US, some 400,000 strong, has one of the
highest educational levels of any US immigrant group, with
three-quarters possessing professional degrees, including
25,000 physicians. She envisioned some sort of "partnership
for prosperity" with their help. Already she calculated that
official remittances from Nigerians abroad came to USD twelve
billion per year, of which about half comes from the US.

--------------------
Regional Cooperation
--------------------

23. Minister Okonjo-Iweala noted that Nigeria did not get
sufficient credit for its positive role in the West African
region. To date, the GON has spent USD eight billion in
peacekeeping and attempts to settle regional conflicts. It is
a major supplier of electricity to Niger on concessional
terms. Uganda owes Nigeria USD six million in loans and for
peacekeeping. And Nigeria established a USD 500 million fund
for the region in the 1980s, at a time when Nigeria really
did not have money to spare.

------------
Trade Policy
------------

24. The Minister emphasized the need for a systematic trade
policy in Nigeria. She attributed the various import bans to
Obasanjo's strong feelings about various imports, such as
counterfeit textiles. She showed genuine cloth made by
NICHEMWAX and showed the counterfeit product from China,
which was undercutting the genuine article by 25%. She also
showed counterfeit tie-died fabrics made in South Korea that
she had bought at upscale G Street Fabrics in Washington, DC.
The president had gotten so angry over such counterfeits,
she said, that he had slapped a ban on ALL textile imports.
While unfortunate, the banned products only account for ten
percent of Nigeria's imports, and the effective duty with
exemptions for Nigeria's overall trade was 20 percent. She
hoped eventually to bring Nigeria's tariff rates into
conformity with those of its ECOWAS partners. She was
surprised to find that some foreign firms with a vested
interests in some of Nigeria's trade anomalies were actually
against the rationalization of Nigeria's trade regime.

--------------------------------------------- --------
Highly Indebted Poor Countries (HIPC), Evian Approach
--------------------------------------------- --------

25. The Minister said that HIPCs, Nigeria included,
represent a major problem for the world that needed to be
addressed. Debt levels remain unsustainably high. It is
unprecedented to go to the Paris Club without an IMF
Structural Adjustment Program in place, but it will be
necessary to renegotiate with the Paris Club in some form, or
the GON will have no capital budget for infrastructure.

26. Minister Okonjo-Iweala hoped that Nigeria could benefit
from treatment by the Evian Approach for debt sustainability.
She hoped the US could spearhead Nigeria's consideration for
this treatment.

--------------------------------------------- --
Cooperation with US Treasury on Debt Management
--------------------------------------------- --

27. Minister Okonjo-Iweala praised the performance of
Treasury employee Francis Odubekun, detailed to the Debt
Management Office, and wished he could stay in Nigeria beyond
the end of his tour of duty, which is about to end. She also
hoped to receive help from the US on tax administration,
automation and information management and to establish the
same software and systems across various departments,
particularly the Budget Office and the Accountant General,s
office. So far, the Finance Ministry is receiving help from
UNDP and the EU on this.

----------------------------------
Millennium Challenge Account (MCA)
----------------------------------

28. The Minister regretted that Nigeria had not made the cut
for the Millennium Challenge Account this year. She was
surprised at this, she said, because the GON had filled out
the application with its fiscal indicators, many of which
were showing a positive trends. The Undersecretary pointed
out that the MCA is decided based on sixteen indicators,
including trade policy, inflation rate, time required to
start a business, rate of school completion, openness,
political freedom, etc. many of which are not affected by
reforms in fiscal policy. Nigeria had not scored as high on
many of these as certain other African countries. Having
submitted only the GON's fiscal portion of the application,
she was unaware of these other indicators and promised to
look closely at the MCA website. The Undersecretary
requested the Minister's feedback as to whether she thinks
all the indicators used are valid measures. The exercise is
backward-looking and does not show current or future reform,
the Undersecretary said, but next year is another year, and
next year's data will start to show this year,s
accomplishments. The Minister responded that future data
will show improvement and invited him to look at the IMF,s
latest Article IV report on Nigeria, which highlights the
GON's accomplishments of the past six months. She noted the
time lag between reform measures and when they show up in
economic data can be demoralizing to reformers, as they ask
people to suffer but cannot show concrete results. But she
was very confident that perseverance would pay off in the end.
ROBERTS

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